The EU bailout of Greece is in fresh crisis today, following the announcement by prime minister Georges Papandreou that the country will go to a referendum on the package, and that he will seek a vote of confidence from parliament to continue his premiership.

The announcement produced shock and alarm throughout the capitals of Europe, and sent share markets tumbling across the continent, by between 2-6%.

The referendum is scheduled to take place “over the next few weeks”, or “before mid-January” according to separate announcements, while the confidence vote will take place on Friday afternoon. PM Papandreou put the proposal as a testament to ancient Greek democracy:

“Citizens are the source of our strength. Citizens will be called upon to say a big ‘yes’ or a big ‘no’ to the new loan arrangement. This is a supreme act of democracy and of patriotism for the people to make their own decision.”

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The shock move towards referendum is being widely interpreted as a desperate political manoeuvre by Papandreou, the overwhelming aim being to forestall demands for an immediate election based on the EU deal. Finance minister Eugene Venizelos gave a forecast of how the referendum campaign would be run, saying:

“Do Greeks want to remain in Europe, in the eurozone with the euro in a country that belongs to the developed world, or do they want to return to the 1960s?

“Do they think it is good to owe E100bn to the banks, or do they not think it’s good to live with such debt? Each citizen will make their own decision, with responsibility, in a process that’ll give a national sense of relief and recovery.”

The argument will be clear: that there is no alternative to the deal if Greeks want to preserve a prosperity that some groups have won from eurozone entry, and contrasting it with a period in which Greece was simply not yet a consumer society. It is a desperate pitch to new middle-classes, in the face of news that up to 60% of the population is opposed to the most recent EU deal.

The announcement threw Greek politics and society into chaos throughout the day — a reaction based on its timing. For two years Papandreou has pursued a strategy of staying in the eurozone, and in the European finance markets at all costs, despite strong opposition both inside and outside PASOK.

Antonis Samaras, leader of the opposition New Democracy party denounced the referendum as “divisive and extortionist”, and said it was a desperate attempt by Papandreou to avoid an election. Third party, the KKE (the Greek Communist Party) also demanded an election, saying the referendum was an attempt to blackmail and “ideologically terrorise” the people.

Fifth party Syriza, the radical left coalition, has also dismissed the move as a ‘trick’ and called on the President (a PASOK member) to convene an emergency session of parliament to consider the deal.

For the PASOK leadership, forcing the crisis may be not merely a desirable, but a necessary move. The party not only faces the melancholy circumstance of being blamed for a crisis that was largely created by the failure of the New Democracy party to address tax evasion, false government accounting and corruption in its near-decade in power prior to 2009.

Indeed, some PASOK MPs have called for a ‘government of national salvation’ as a way of sharing responsibility for the unpopular measures.

But New Democracy has indicated its determination to make Papandreou and PASOK wear the crisis alone, with talk of plans for a mass resignation of ND MPs, from their own party. If more than 60 of ND’s 85 MPs (in a 300 seat parliament) resigned, then a complex constitutional requirement would leave the PM no choice but to recommend new elections to the President.

The fourth party, a hard-Right group called the New Orthodox party has also said it may consider a mass party resignation.

Even if this does not occur, Papandreou faced a razor-thin margin even when the referendum was announced on Monday evening. PASOK had 153 MPs at that stage, and it needs 151 to hold confidence. By lunchtime Tuesday, it was clear that that Papandreou was in deep trouble, with one PASOK MP, Milena Apostolaki, quitting the party and becoming an independent, and rumours that six PASOK (non-parliamentary) senior officials wanted Papandreou to step down.

The wavering of many PASOK MPs is in response to the utter wave of hostility that has greeted them in everyday life. “We can’t even go to the taverna,” one complained, noting that they were constantly abused by strangers, and even friends and family.

More worrying were public protests on 28 October, “Oxi” (“no”) day, which commemorates Greece’s refusal of Mussolini’s demand for free passage of Italian troops across Greece. This refusal triggered first an Italian and then a German invasion, and enormous loss of life in the subsequent war.

In this year’s commemoration, marches and ceremonies were disrupted all over the country, the President was forced to leave the main commemoration – and perhaps most alarmingly for many, army troops exchanged blows with protestors.

So everyone is playing a dangerous game. Papandreou can claim that an election would not give a clear mandate to pursue one course or another, and that the New Democracy party would not offer any clear alternative.

He may also be indulging in the strategy he has employed since elected, which is to represent himself as a ‘good European’ to the markets, keeping his unruly populace in line, and as a Greek patriot to his own people, holding off the worst demands from Europe.

The double-whammy of an EU deal and a referendum is, quite possibly, a winner-take-all strategy — the equivalent of walking into a bank foyer with a bomb. Papandreou may be hoping to get yet more money from a yet-further expanded EFSF, or from the newly-mooted and hilariously titled Special Purpose Investment Vehicle — or SPIV.

This would essentially allow him to agree a payment plan, without implementing the very worst cuts to social services, or a sell-off of practically everything still in public hands. Should it be voted down, Papandreou can resign, and let someone else try to square the circle, departing on a decisive moment, rather than being shuffled out by PASOK heavies.

Many argue that such an emergency strategy was made necessary by the sudden widening of Italian bond interest rates — out to nearly 7% on 10-year yields. At this point Italy’s mammoth debt becomes unsustainable — or it requires the whole of the newly-expanded EFSF, nearly euro 1 trillion, to bail it out.

Meanwhile New Democracy has no plan, at least not one that involved democratic procedures — it would be the last party to actually leave the EU, and the people behind it are already imagining a recourse to solutions that the Greek Right has applied in is past.

The stakes are high – indeed deputy PM Venizelos was, on Tuesday, taken to hospital with stomach pains, later shown to be an inflamed appendix, effectively a physical meltdown to match the economic one. Meanwhile the government quietly and rather suddenly replaced the heads of all defence forces in one fell swoop. Tensions will only rise through November.

On November 17 is “Polytechnia” day, which commemorates the bloody attack by the Generals junta and the army, on students holed up in the Athens Polytechnic in 1974 — a day when the Left claims its heritage as central to the fight for democracy and for the Greek nation. This year it will be an occasion for different groups to stake their claim to the nation’s destiny — and there is no telling who will be running the country then.

Should there be a referendum (the constitutionality of which is, at this stage, far from certain) and should it reject the EU deal, then the country would default on its debts. After that, it’s anyone’s guess. There’s no way it could stay in the euro, but no way it can default.

And the default would trigger a credit default swap cascade, which could well finish off the global banking system. Greece’s move has prompted an emergency meeting between Nicolas Sarkozy and Angela Merkel on the matter, at the G20 meeting in Cannes tomorrow.

The crisis may take more than one government, with demands for a (on participating in the bailout) being heard in Germany, and the FDP — junior member of Merkel’s government — saying it would be happy to see Greece default and exit the euro.

Crisis indeed: from the Greek, the moment at which the patient lives or dies.